Eight weeks and counting…

news: Eight weeks and counting…

Are your tax affairs in order for the July 1 deadline?

FOLLOWING a meeting of EU Finance Ministers in Brussels on April 12, the council announced that it was “convinced” that everything will be in place for the Savings Tax Directive to start at the beginning of July as planned.

This revolutionary regime for taxing the savings of EU residents was first conceived over a decade ago. While over the years many doubted that it would ever come to pass, it now looks certain to come into full force and effect in just two months’ time.

This EU Directive allows for the full automatic exchange of information on interest payments received on savings and investment income across the 25 EU Member States. This will result in EU residents’ interest earnings from personal deposits and income producing investments held in another EU State being taxed at appropriate rates in their home country.

EU banks and financial institutions will be obliged to openly disclose details on your savings income to your home tax authority. This will happen annually and automatically; not only when tax evasion is suspected.

Payments affected include interest on bonds, savings certificates, term deposits, current and savings accounts. Other types of income, including company dividends, pensions, life assurance policies and rents are not considered to be savings income.

Three EU Member States (Luxembourg, Austria and Belgium) have been granted a transitional respite from the above exchange of information provisions, but, while they will not disclose information, they will deduct a withholding tax at source. This could complicate matters for those people who already pay domestic tax on their savings earnings.

Additionally, the EU fought hard to get “equivalent measures” agreed in a number of third countries, including Switzerland, Andorra, Liechtenstein, Monaco and San Marino. The UK offshore dependent territories and the Caribbean jurisdictions constitutionally linked to the UK and the Netherlands have also signed up. They were given a choice of either exchange of information or applying the withholding tax.


The Directive should have started on January 1 this year, but it was postponed by six months to allow Switzerland and other territories sufficient time to harmonise the legislation into domestic law.

Switzerland resented being blamed for the delay and made it clear that it would fulfil its obligations under the terms of the agreement, both in terms of timing and implementation.

The Swiss financial services industry has been working overtime to prepare for the introduction of the withholding tax. It signed its agreement with the EU on October 26, 2004 and the necessary domestic legislation was subsequently passed. The Federal Tax Administration published its first guidelines back in October and, today, Switzerland is further ahead than most EU countries.

Jersey, Guernsey and Isle of Man

Clients in these jurisdictions are being offered a choice of exchange of information or retention tax (which is exactly the same as withholding tax).If, therefore, you do not wish to pay the withholding tax, you can sign an agreement with your bank asking them to exchange information with your home tax authority instead. This means you will pay domestic taxes instead and must declare all your savings income on your tax return.

If you bank in the Channel Islands or Isle of Man, your bank should write to inform you of this choice. However, banks are only now starting to do this and, while the impending Directive has been well publicised in some countries, there has been much less information available in the UK. This may result in some UK residents being taken by surprise when they receive their first bank statements after July 1.

According to a Telegraph article on April 4, Guernsey banks and building societies were still preparing to inform customers on how the Directive will work. Philip Winfindale, manager of the Co-op Bank Guernsey and chairman of a committee of Guernsey high-street banks and building societies, said: “Once issues are finalised, we plan to issue a brochure together with Guernsey Finance for the benefit of customers. There are also plans for dedicated inquiry lines for customers.”

It seems a little late in the day to be making these preparations and anyone affected by the Directive should really have been well informed before now. If you are uncertain about how the rules relate to you and what your options are, seek expert advice urgently. There is not much time left to get your affairs in order and prevent you from being caught out by either the withholding tax or exchange of information.


Gibraltar’s relationship with the UK and EU meant that it was not given a choice.Gibraltar banks will begin the process of automatic exchange of information from July 1 – there will be no withholding tax option.

Key facts

Automatic exchange of information and the withholding tax will be levied on:

• Interest earned on deposit accounts

• Interest bearing debt claims, such as bonds issued after March 1, 2001

• Accrued or capitalised interest (zero coupons)

• Investment funds with at least 40 per cent of the underlying investments in interest bearing instruments

The following will be excluded from the automatic exchange of information and withholding tax provisions:

• Life assurance policies (Personal Portfolio Bonds, including any withdrawals from them)

• Stocks and shares

• Currency trading

• Derivative instruments

• Bonds issued before March 1, 2001

• Equity related structured products

• Pension products

• Payments to trusts or companies

Withholding tax rates:

July 1, 2005 – June 30, 2008: 15 per cent

July 1, 2008 – June 30, 2011: 20 per cent

July 1, 2011 onwards: 35 per cent.

Contributed by BILL BLEVINS

Financial Correspondent

Blevins Franks Trustees